Dredging Already Pays Off for Yuzhny Port (Ukraine)

Dredging work at the Yuzhny port is nearing completion, and cargo owners are already analyzing its benefits. Enhancing the capabilities for working with capesize vessels will significantly increase the flows of export, import, and transit cargoes.

Access to capesize vessels (over 200,000 deadweight tons) provides a competitive advantage during transportation of ore and coal cargoes. Ukraine, with a water depth of 15 meters, was able to ensure the use of only 70% of the tonnage of such vessels and the vessels had to complete loading in the roads (i.e. in the approaches to the port area).

This significantly increased the cost of freight, as well as the time and cost of loading. Competition in the market has become so fierce in recent years that domestic ports and stevedoring companies have been forced to develop a whole system of technological measures for completing the loading of capesize vessels in the roads in order to meet the growing demand for transportation via this type of vessels.

“Cargo owners working with iron ore transported it with Capesize vessels because it is cost-effective. It was necessary to implement this project in order to provide a high level of customer service, preserve transit goods, and attract additional cargo flows, thereby increasing port revenue and revenues into budgets of all levels. The source of funding for the investment project is exclusively the earmarked port charges that ship owners pay when ships are entering the port. In this case, the investment in this project is the result of the net profit after payment of taxes and duties into budgets of all levels, as well as payment of dividends to the state,” the Yuzhny port’s Director Oleksandr Lahosha said in 2012, a few months before the start of the dredging of the approach channel and waters of two berths to a depth of 21 meters, which is one of the most ambitious infrastructure projects in Ukraine.

“As confirmation that the right strategy was chosen for development of the Yuzhny port, a constant increase in cargo traffic is being observed today (it increased by 2.3 million tons in the first half of 2014, compared with the first half of 2013). At the same time, revenues from port charges are increasing,” said Yurii Vaskov, the deputy head of the Association of Seaports of Ukraine. “The uniqueness of this project lies in the fact that it will begin generating additional revenue from port dues from July 1, i.e. during the stage of its implementation.”

The dredging work began in February 2013. From that time to the beginning of June, the port managed to increase its channel draft from 14.5 meters to 18.5 meters. Thus, the Yuzhny port has already become the deepest deep-water port on the Black Sea. However, under to the project, the water depth will increase to 21 meters by the end of this year.

“Both ship owners and shippers are already seeing the main effects of the dredging work that has been performed. Previously, ships left berths with a draft of 14.2 meters to finish loading in the roads (to 18.5 meters). It will no longer be necessary to finish loading in the roads from July. This will enable cargo owners and charterers to save time and money. It currently costs USD 50,000-60,000 to charter a Capesize vessel for only one day. Thanks to the increased loading volumes at berths, the total period for loading a vessel has reduced by 4-5 days,” said head of the Yuzhny port’s administration Maksym Shirokov.

According to Lahosha, there will be a significant increase in cargo traffic due to an increase in transshipment of iron ore belonging to the SCM Group through the TIS-Coal terminal (to 500,000 tons per month) while the volume of transshipment through the Yuzhny port will remain unchanged because the SCM Group is already using the full capacity of the port.

The new depths have immediately become popular on the market: 19 vessels have been loaded since the end of March, when the Yuzhny port announced the increase of its channel draft to 17 meters, including four vessels with drafts of 17.5 meters and one vessel with a draft of 18 meters. Three vessels with drafts of 18.5 meters will be loaded before the end of June. The capesize vessel Kanaris is already being loaded with iron-ore concentrate at the port, and it will depart with a draft of 18.5 meters on June 22 without additional loading in the roads.

Exporters strengthening their positions

Ukrainian cargo owners received the information about the new water depths at the Yuzhny port with optimism – it enables them to save significant amounts by eliminating expensive loading of vessels in the roads.

For example, the DTEK holding shipped coal products to customers in Britain in a capesize vessel in March this year. “Previously, this type of vessel was forced to complete loading to its full capacity in the roads (outside a 12-mile zone) because of insufficient water depths at the Yuzhny port’s berths, which placed an additional financial burden on the cargo owner and the charterer,” DTEK’s director of commercial operations Andrii Favorov said.

Now, according to officials at DTEK, the new water depths allow capesize vessels to be fully loaded directly at a berth, which reduces the loading time of a vessel by 4-6 days. This results in substantial savings of USD 200,000-300,000, depending on the current state of the freight market and the technical characteristics of a particular vessel.

The increase of the water depths at the Yuzhny port is a step towards improving the competitiveness of Ukraine’s iron-ore exports in the world market. As a result, the Ukrainian ore mining industry will reduce the gap between it and the world’s major competitors – producers from Brazil and South Africa, which were initially focused on delivering iron ore by sea via vessels of the capesize class at minimal expenditures per ton.

Transit prospects

The implementation of the dredging project at the Yuzhny port will also facilitate an increase in the volume of transit cargo. Ukrainian ports have seen a decline in this area in recent years, with transit cargo volumes reducing by tens of millions of tons of cargo. The increased water depths at the Yuzhny port will at least demonstrate realistic ways of solving the transit problem if not fully compensate for this decline.

A case in point is the Metalloinvest holding (Russia), the only company that ensures the presence of transit cargo in the Yuzhny port (up to 3 million tons of iron ore per year). The company’s senior trader Vakhtang Kocharov said in comments to the CFTS portal that the dredging project is already having a positive effect on export shipments of any bulk cargo handled by the port. “As the only deep-water Black Sea port with terminals having exclusive equipment (unfreezing facilities, railcar dumpers/wagon tipplers, etc.), as well as a draft of 18.5 meters, the Yuzhny port opens truly unique opportunities for exporters. We plan to double deliveries within three years, thanks to the expanded capacity for working with vessels of the Capesize class,” said Kocharov.

Metalloinvest estimates that a cargo owner saves about USD 1-1.5 dollars per ton of cargo by switching from completing the loading of vessels in the roads to fully loading vessels at berths.

Future plans

According to Alexander Smirnov, the general director of the Portinvest Holding, the successful example of investment in development of maritime infrastructure at the Yuzhny port (the approach channel and the operational water area) and the real demand for it from cargo owners, stevedores, and ship-owners demonstrate the need to continue developing maritime infrastructure – dredging of the port’s channel and the water area around the berths of the existing terminals (the terminals of Borivage and the TIS Group) and the new specialized bulk, grain, and liquid bulk terminals that are under construction (the terminals of Allseeds, Ukrlandfarming, and Portinvest).

“Implementation of infrastructure projects in the port’s waters is beneficial to both businesses and the state. With access to deep-water berths and waters, businesses can build modern specialized terminals and use the most modern vessels to support the increasing flow of exports. The state receives an increase in foreign-currency earnings from export and transit of goods, port charges, taxes, and fees into budgets at all levels, as well as qualitatively new jobs,” said Smirnov.

“To plan the work involving the dredging of the port’s channel and the operational waters around the berths at the terminals that are currently in operation and those under construction, I have formally requested the necessary information from these companies, including the required depths. We are currently in in active dialogue with the Borivage company on this issue. I am awaiting the relevant information from the TIS company,” said Shirokov.

Shirokov also stressed that the Yuzhny port authority will have enough money for implementation of these projects, given the dredging work that has been performed already, the ever-increasing cargo traffic, and the corresponding increase in revenues from port charges.

In similar ways to the development of the Yuzhny port’s waters, the Administration of Seaports of Ukraine’s head Andrii Amelin has announced plans to dredge the approach channel in Skadovsk (to 6 meters), the Belgorod-Dniester channel, the Izmail port, and the Ilyichevsk port.

With the adoption of the Law of Ukraine on Seaports, reform of the industry has begun. Contrary to the views of skeptics and opponents of reform, it has been possible to translate words into action within a short period (one year) to create the port with the deepest water in the Black Sea region, which has increased the competitiveness of Ukraine’s export and transit goods.

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Press Release, June 24, 2014